When markets are running hot like they are now, most people’s first thought is about making some quick money on a property in the short term.
While it’s nice to see our balance sheet grow, the reality is that if you truly want to find success in property and build up a portfolio that is going to set yourself up for life, you need to realise that this is not likely going to be something that happens quickly. In fact, I would suggest that virtually all people who have built large property portfolios have done so over an extended period of time and over the course of numerous property cycles.
There’s no doubt that property has been the single biggest contributor to most people’s wealth in Australia. However, most find themselves paying off their own family home and never truly setting themselves up by investing wisely, with a goal of achieving success in the long term.
In truth, property really does lend itself to long-term thinkers and that’s because there are a few practical limitations that slow most people down when they attempt to get into property.
For most people, having the money to contribute as a deposit on a property will run out at some point. The vast majority get into their first property through savings or a helping hand from family and that’s where their journey begins.
Unless you have a very high paying career or a successful business, you’re going to need to select high-quality investments that will ultimately see capital growth in order for you to grow your property portfolio. Once again, you need to have that long term thinking in order to appreciate where it is you want your property portfolio to go.
While we do see boom times that boost house prices by significant amounts, for the most part, the best way to ensure you’re going to generate strong capital growth is by buying in blue-chip locations. The Eastern Suburbs of Sydney is a great example of a location that will always see strong demand and therefore good growth potential. While there might be a few years, here and there where price stagnates, over long periods of time demand will always outstrip supply which causes price appreciation and your portfolio to see growth.
The other side of the equation is the ability to get finance and service your debts. Most new property investors will likely be struggling to grow their property portfolios because banks will ultimately put a cap on how much money you can borrow.
Your serviceability is based on your income which includes both your salary and the income you earn from your rental properties.
However, it is important to note that the rents that you receive (or the yield on those properties) will also increase over time. Once again, this normally doesn’t happen quickly, but if you have a long term horizon, time will help turn what might be a neutral or negatively geared property, into one that is cashflow positive and it won’t, therefore, weigh on your borrowing capacity as much.
Blue-chip locations are a great way to ensure that rental growth, however, it is also possible to get strong yields in premium regional locations such as Newcastle.
We all understand that compound interest is the greatest way to build wealth. However, that can’t happen when you are thinking short term.
However, compound growth also happens with the small decisions you make in life adding up one by one. So while we might be able to enjoy the short-term windfall that comes with price growth that we’re seeing in the current market, continue to think about growing your portfolio for the long term.
Consider what the limitations might be for growing your portfolio and buy wisely to avoid running into problems later.
Make good decisions today and they will hold you in good stead for decades to come.